The minister today released the terms of reference for a review of the Dairy Industry Restructuring Act, which enabled the 2001 creation of Fonterra, which is expected to lead to legislative changes next year. The government passed temporary legislation to delay the expiry of provisions requiring Fonterra to accept milk from any South Island farmer wanting to join the company to allow a deeper look into the industry.

The review will be split along export and domestic lines, which are seen as separate but connected, and include whether the dairy sector is operating in the long-term interests of New Zealand consumers in terms of prices, availability, quality and product range. While it will focus on the DIRA legislation, officials will account for the wider regulation system including the Resource Management Act, Animal Welfare Act, Health and Safety at Work Act, Immigration Act, Overseas Investment Act, Financial Markets Conduct Act and Commerce Act.

"In particular it will look at open entry and exit for farmers, the raw milk price setting process, contestability for milk, the risks and costs for the sector, and the incentives or disincentives for dairy to move to sustainable, higher-value production and processing," O'Connor said in a statement. "The whole dairy sector needs to look ahead to see what trends and potential disruptions are coming our way and get ahead of consumer trends."

The Ministry for Primary Industries will lead the review with support from the Ministry for Business, Innovation and Employment, Treasury, the Ministry for the Environment, the Ministry for Foreign Affairs and Trade, the Commerce Commission, and external experts.

Holding legislation to prevent the expiry of Fonterra's contestability and efficiency provisions was needed after independent processors collected 22 percent of all milk solids in 2015, triggering a review of the law.

The previous administration had planned to relax some of the conditions on Fonterra to accept milk supply from new dairy conversions and would phase out the need to sell regulated raw milk to large rival processors. Those proposals followed a Commerce Commission review that found Fonterra's market dominance still warranted regulation.

In a cabinet paper, O'Connor said he expected the main concerns will be the open entry and exit provisions requiring Fonterra to accept milk from all-comers and their impact on the industry's environmental outcomes and Fonterra's ability to invest in value-add processing, and the requirement for Fonterra to sell milk to rivals and how that affects the future structure of the industry.

Fonterra's milk price-setting processes and their impact on land use, land values, and incentives to invest in innovation were also seen as a likely focus, as was Fonterra's cooperative structure and how that weighs on the company's ability to raise capital, and how the changing dynamics of wholesale domestic supply affects the long-term interests of New Zealand consumers.

Officials will meet with stakeholders and identify issues and options between May and August, before considering potential options for change in the final three months of the year. Government is expected to receive a report early next year with legislation tabled in Parliament in 2019, the terms of reference say.

O'Connor told cabinet the dairy herd improvement supporting national genetic gains would be excluded from this review and will be part of a separate process. The terms of reference also exclude the financial, environmental, and animal health and welfare performance of dairy farming which comes under MPI's farm systems change project, international trade and access rules that fall under the new trade agenda, and quota access allocations in foreign markets.